loan approval

“Wait, you mean I’m not approved?!” If you’ve ever heard yourself say this, you know what it’s like to be left in the banking dust.

Banks turn down loans for a bunch of different reasons. And sometimes, it doesn’t have anything to do with you.

Knowing the loan approval factors before you apply means you aren’t left in shock because the bank passed on your loan. It also means you can help make your loan more appealing by improving your credit, offering more cash, or pledging extra assets.

In this article, we’ll discuss the top 8 factors influencing your loan approval.

1. Your Credit Score

Of all the factors, credit score ranks first because it’s by far the most important. If you’ve got poor credit, you won’t get approved.

The bank first looks at your FICO score. When they pull your credit report, this score is right at the top. FICO ranges from 350-850 and the higher your score, the better.

But they don’t look only at FICO. Banks also look at your credit history as a whole. That means they’ll see late payments, collections, and judgments.

They’ll also see if you’ve ever filed for bankruptcy and how long ago that was. If you’ve got any of these issues on your credit, beware that the odds of loan approval are low.

2. Your Income

Whether you’re self-employed or work as an employee, you must show income to get a loan. And how much income you make matters.

When the bank processes your application, they calculate how much you need to support the new payment on your loan. One common method of calculation is the Debt to Income (D/I).

For consumer loans, like a car or home loan, the bank wants to see a D/I of less than 45% after the new payment.

And you’ll need to prove where your income comes from. This is more difficult for those that are self-employed.

Tax returns and business statements work for a business. And personal income is verified using W2 statements and paystubs. Make sure you have the necessary paperwork before you apply.

3. Your Down Payment

Not all loans require a down payment. But most of them do. And a down payment helps to mitigate risk if you have less-than-stellar credit.

Home loans or any type of real estate loan often has a down payment requirement. Banks like to see 20% down, but sometimes they’ll take less.

The bank also wants to see where the money from the down payment comes from. Which brings us to our next point…

4. Your Assets

It’s important that you show the bank that you have some assets. The loan application often has fields for you to list all of your debts and assets.

Personal assets are cars and recreational merchandise, like campers or ATVs. Your home and any other real estate you own is an asset. Business interests also count as assets.

Business assets could be real estate and business equipment.

And then there’s cash. It comes in the form of IRAs, retirement accounts, and checking and savings accounts. If you’ve pledged to put cash down on your loan, you must provide proof of where that cash comes from.

Why do banks want proof of assets? They want to make sure you aren’t taking out a loan with another bank for the cash down. Verify cash assets with statements, like retirement account statements or bank statements.

5. The Value of Your Collateral

If you’re applying for a secured loan, it means you plan to pledge collateral to the bank in exchange for a loan. And the value of that collateral matters for your loan approval.

Collateral is most important with real estate loans where the bank plans to take a mortgage on the property. But it also applies to term loans such as car loans and boat loans. The value of the collateral must support the loan amount.

And the value must also be within the loan policy guidelines of the bank. Banks use a measure called Loan to Value (LTV). And every bank has a guideline for the highest LTV that’s acceptable for the type of loan.

For real estate, banks like to see an LTV of 80% or less. Meaning the loan amount is 80% or less of the value of the real estate. The lower the LTV, the less risk the bank has to take.

6. The Type of Loan You Need

The type of loan is important because of the requirements the bank sets forth in their loan policy. Banks view business loans differently than personal loans.

As we mentioned in #5, the collateral makes a difference too. An unsecured loan has stricter guidelines for approval than a secured loan.

Also, revolving loans have different guidelines than term loans. A revolving loan usually has interest-only payments due. A term loan has a set stream of payments spread out over a specific term.

7. The Real Estate Market

If you’re looking for a real estate loan, the market has a say in your odds of approval. When real estate markets crash, banks are less likely to lend money on real estate.

The market also dictates how much the property is worth. During market highs, properties are worth more. That means the bank is willing to risk more money on a loan for that property.

8. How Much Debt You Already Have

As we mentioned in #2, your income matters for your loan approval. But so does your debt.

The bank calculates D/I based on how much debt you have going forward. If you have lots of debt to service every month, your loan is less likely to get approved.

Plus, the amount of debt you have with the bank matters too. Banks must stay under certain lending limits with certain customers. They might need to pass on a loan if you’re over that limit in debt with that bank.

Know the Factors of Loan Approval

The loan approval process is not black and white. Knowing the approval factors ahead of time helps you keep your expectations in order during the application.

Remember that clean personal credit is essential for loan approval. You’ll need to prove where your income comes from and what assets you have to back up the loan. Down payments are important, especially with real estate loans.

The value of the collateral for the loan matters to the bank. And so does the real estate market. If the market isn’t humming, you might not get approved.

Also, the type of loan you’re looking for matters because the bank has different criteria for different types of loans. You may qualify for one type but not another. Finally, the amount of debt you’ve got also weighs on the bank’s decision.

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